Fed Opens Door for Higher Stocks, Commodities

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Tue, Mar 16 2010, 23:37 GMT
by James Hyerczyk

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Earlier this afternoon, the Federal Reserve left its benchmark interest rate unchanged and reiterated that interest rates would remain low for “an extended period”. In its statement, it also mentioned that inflation remains subdued, and that the weak employment situation seems to have stabilized. While this may sound rosy, the Fed did express concerns about housing and employer reluctance to increase payrolls.

The tone of the statement suggests that while the Fed seems to have a plan as to how to begin reducing stimulus and returning interest rates to normal, it still is having trouble deciding when to initiate the first rate hike. One obstacle it faces is the possibility it will kill the recovery if it hikes too soon. The other more important obstacle is inflation. Although by its standards, inflation is low, there is a possibility that all of the liquidity that has been pumped into the financial system may trigger a spike in prices.

The overall dovish tone of the statement gave the go ahead for traders to continue to use the Dollar as a funding currency thereby driving up demand for higher risk assets.

June Crude Oil rebounded after a two-day sell-off. Increased demand for risk is making commodities more attractive. Technically, a failure to take out the main top at 83.80 on this current rally will indicate the start of a down turn, but this is unlikely since the Fed green lit higher prices by deciding to keep interest rates low.

The U.S. Dollar weakened after the Fed’s dovish statement. This weakness helped to boost April Gold prices into the close. The recent break in gold stopped short of the late February bottom at $1088.50 to maintain the uptrend. The current rally has reached the 50% level of the recent range of $1145.80 to $1097.30. Further weakness in the Dollar should continue to drive precious metals higher.

Gold bugs came in on Monday to support prices after the hard sell-off in the British Pound triggered concerns that the currency would collapse over concerns about its ability to service its debt and a possible cut in its credit rating. As long as this is an issue, look for buyers to support gold as they debate whether hard assets are a better investment than paper currencies.

Stock indices close higher but slightly off their highs. The markets were up from the start, boosted by demand for higher yielding assets. Later in the session, the Fed helped the indices reach new intraday highs by promising to keep interest rates low for a prolonged period of time. Although the trend is up, traders have been reluctant to chase the markets higher. This means they are still susceptible to profit-taking breaks.

June Treasury Bonds surged to the upside after the Fed left interest rates unchanged. Nothing in the Fed statement hinted at as to when the Fed would begin hiking interest rates. This helped investors gain confidence in trading the long side of the market.

Published on Tue, Mar 16 2010, 23:45 GMT